John Mauldin – The Demographic Cliff and the Spending Wave

For today’s Outside the Box, my longtime friend Harry Dent is letting us have a look at chapter 1 of his latest (and I would say his greatest) book, The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019. Harry’s grasp of the impact of demographics on economies and investments is unexcelled and unambiguous. We all know that demographics really matter, but Harry has looked deeper and harder and understood better than any of us.

One of the key insights Harry brings to us is the concept of the Spending Wave. In other words, it’s not just when you and the rest of your generation were born that matters, it’s when youspend. At what age does your spending peak for housing or for child rearing or travel? Harry and his team have developed really good numbers on all of this, and from that data they have been able to consistently predict major macroeconomic trends. Harry summarizes the recent decades and the coming ones like this:

The demographic climaxes in average peak spending led to the rising boom from 1983 to 2007, then the slowdown in 2008 that will carry on until 2020 until trends bottom out and 2023 before trends turn up again. These numbers won’t predict stock crashes and swings in the markets in between, but the big picture is undeniable.

There is a lot more to Harry’s thesis than we can fit in an Outside the Box – chapter 1 alone runs 35 pages, and I can only bring you the first 10 here. So to help you bring Harry’s work into immediate focus – and because I always like to compare notes with Harry – I recently asked him to sit down with me and talk over what we can expect to see in 2014. Some interesting ideas emerged at the intersection among demographics, debt, and deflation – three of the “Killer D’s” that were my topic in last week’s Thoughts from the Frontline – and we also looked at potential great trades for the coming year.

Our conversation, moderated by Mauldin Economics publisher Ed D’Agostino, is availableright here.

John Mauldin - The Demographic Cliff and the Spending Wave

I write this note from the airport lounge in Riyadh, Saudi Arabia, at the beginning of a long 24 hours to get back to Dallas. Riyadh was a fascinating exclamation point on my foray into the Middle East. When visiting a new country or region, I try to arrive with as few expectations as possible … and then absorb.

I have to say that my hosts, the MASIC group, treated me as well and as with as much genuine hospitality as anyone has done in any of the 60+ countries I have visited over the years. Sometimes that can be person-specific, and certainly the family that owns MASIC spent a lot of personal time taking care of me and the other speakers; but I also observed here how people in general are treated, and I found myself appreciating a tradition of hospitality that I had heard a lot about but never had the opportunity to experience first-hand.

Oddly enough – and I have to admit this observation was a bit outside the scope of my expectations – I found a good deal of similarity between a nation with a “country” Bedouin cultural heritage and the cowboy culture and mythos I grew up with in West Texas. The differences are also apparent and were somewhat jarring at times, but somehow the overall sense of the people was strangely familiar. These are people who, once they are your friends, treat you with a deeply felt sense of honor and acceptance. Where I grew up in Texas, the meaning and value of a handshake was drummed into me at an early age. I think a handshake might have value here as well. Just my impression.

I have a great fascination with Japan and the Japanese culture, but I am not sure I will ever understand it very well, except perhaps in an intellectual sort of way. Here, I got the sense that the gulf of personal understanding was not as wide. Big differences in style, yes. But then the world thinks all Texans wear cowboy hats and boots.

The MASIC group that invited me is an old Saudi business that has grown quite large, yet the family is clearly quite involved and is dealing with many of the very same issues that large family firms in the US confront. And is dealing with them more openly than many.

I’m afraid I often learn a lot more from the people I meet on these trips than I impart to them. On this occasion I laughed a lot more than usual – and had some quite serious conversations as well.

The entire Middle East is in the midst of great change, in a world that is changing even faster. I am forcibly reminded on trips like these that the world is simply unprepared for the rapidity and scale of change that is going to happen over the next 20 years. The jobs we will have in 20 years will be quite different from the ones we have today. Think 1850 to 1950 in the US – but compressed into one lifetime.

And yet I was asked some of the right questions during my stay here, which is more than I experience on many trips. All too often, we humans we want to figure out how to protect ourselves from unwanted change rather than trying to make the change work for us.

British Airways is calling my flight, so it is time to hit the send button. Among other little problems, their seat ate my brand new iPad on the trip out here, so my plan to sit and read on the return flight to London has gone by the wayside. Sigh. I look forward to being on American from London and having wifi for nine hours. Maybe I can catch up a little with my email inbox.

I will write this week’s letter from Tampa, as I have to make a quick trip there to meet with some medical research teams, along with my friend and colleague Patrick Cox. There are fascinating discoveries being made, and I have an opportunity to talk with a newly forming group that is working on the types of changes we all want. What a fascinating world I have stumbled into, where I seem to have a front-row seat to watch all sorts of stupendous changes unfold. Have a great week.

Your once again running to the gate analyst,

John Mauldin, Editor
Outside the Box
[email protected]

The Demographic Cliff Around the World

By Harry Dent
(An excerpt from chapter 1 of The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019)

One simple indicator warned of the crashes in Japan from late 1989 forward and in the United States in 2008. It’s called the Spending Wave.

The wave is not a function of stock valuations, but of consumer spending patterns over the course of their life cycle. It’s about the predictable things people do as they age.

Demographics tell us a typical household spends the most money when

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